Rate-Making, Smoker Surcharge, and Insurer Risk Management Under the U.S. Affordable Care Act

Rate-making — a vital component of insurance and risk management — can be creative and at times contentious because pricing is its central goal. In the United States, the Affordable Care Act (ACA) permits insurers in the non-group and small group markets to vary health insurance premiums only on the basis of age, geographic location, family coverage, and tobacco use. Tobacco use as a rating factor in setting insurance premiums cannot exceed 50 percent of the non-smoker rate. Academic literature is limited and focuses on questions of insurance accessibility and equity, and smoking cessation impact. There is yet no study or evidence available on the price or financial burden that may be imposed by rate-making on (different variants of) the smoker or tobacco surcharge. In approaching the surcharge from a payer — rather than enrollee — standpoint, this study conceptually investigates how insurers might devise tobacco surcharges to manage objective risk and their premium price implications while meeting both regulatory and business imperatives. The federal standard age curve of the CMS (Centers for Medicare & Medicaid Services) and sampled insurer rating schedules were used in this study to develop illustrations of multiplicative and additive rate structures of the tobacco surcharge. Findings suggest that insurers have latitude to apply tobacco surcharges within and perhaps beyond the substantive intent of healthcare reform, provided the state where they operate does not prohibit it or only reduces the federal cap. ACA implementing and state regulations do not appear to restrict or diminish such flexibility. The risk-related and public policy consequences of modified community rating for smokers are addressed by way of conclusion.